In last month’s issue, I talked about whether our faith and certainty are justified.

In this month’s issue, I look at the obstacles and uncertainties we face as we make our way through the second stage of the crypto market cycle.

On August 17, 2023, Bitcoin’s price completed its third-biggest drop of 2023 (so far), its biggest downswing since June, and its biggest liquidation event since FTX.

Isn’t it crazy that this massive dump moved the price down only 10% in a day and only 20% since the most recent high price of $31,800?

Huge event, normal volatility.

Premium subscribers, you already know what price is a magnet for Bitcoin. You (and I) just don’t know if it will get there and if so, when.

So, no surprises here and no need to try to outsmart the market. All is going to plan. Act 2 of Bitcoin’s market cycle is playing out as you’d expect.

Answers blowing in the wind

It doesn’t feel like that, does it?

Priya in the Park insists the end is near, and she’s called every crypto bear market—sometimes more than three years in advance! She’s always right!

If only she’d tell us what “near” means and what crypto prices will do before everything collapses.

Speaking of which, Bitcoin’s price is up only 60% this year. OGs and mainstreamers wonder why it’s performed so poorly.

At the same time, the bear market warriors believe crypto will have another moment in the sun, they just can’t agree whether that means the market will peak at $60,000 before the halving, go higher with diminishing returns through 2025, end sooner than expected in a “left-translated cycle,” or reach some other number on a timeframe that fits within the cycle theories, trading charts, and data models.

Macro guys tell you the wheels are about to fall off the world’s economy but 2022’s Recessionistas apologize and tell you that the recession’s been called off.

On-chain gurus say prices have to go up because 75% of Bitcoin’s supply sits in the hands of people who either don't care about it anymore or will HODL no matter what prices do. Technical analysts say prices have to go down because “there is no liquidity,” “macro,” “we need capitulation first,” and “market structure is broken.”

At the same time, stablecoins continue to bleed, along with exchange volumes and general interest in crypto.

Billy the Neighbor just bought back the Tesla stock he sold at the 2022 bottom but he isn’t hitting you up for altcoin recommendations anymore. Your family thinks you lost all of your money.

Your favorite regulators tell you everything except Bitcoin is a fraud that needs to go away. The best-known conspiracy theorists tell you Tether, Binance, Huobi, Curve.Fi, and [fill-in-the-blank crypto entity] will implode because of regulators, insolvency, central banks, law enforcement, quantum computers, and whatever else the social media algorithms slip into their feeds.

But nothing’s collapsing, regulators can’t seem to stop the frauds, Wall Street’s preparing to take over the space, and crypto is not going away.

Think out of both sides of your head

Are you confused?

Don't worry about it! This is normal during the disbelief stage of the market cycle.

Most people who wanted to sell have already sold but we still have an overhang of supply from skittish newcomers, underwater bandwagoners, late longs, prospective Mt. Gox settlement recipients, miners, and the US government. It's also possible that fraudulent exchanges are dumping their customers’ cryptos to raise money.

We don’t have enough buyers to make up the difference. Prices have gone sideways for months. Every upswing ends with a downswing. You get your hopes up, only to be let down.

As a result, your mind simply can’t convince you that this market could ever recover.

Curve.Fi gets hacked and seems on the verge of imploding DeFi, so you keep your money out of the market. You haven’t found a narrative that will bring new money into crypto, let alone a narrative that fits what you’re looking for, so you sit on your hands waiting for the altcoin capitulation or some news to get you hyped up again.

China is on the verge of an economic crisis. Europe isn't doing so well, either. I'm told the US banking sector is about to fall apart.

On the flip side, the people who haven’t bought can’t sell and the people who sold can’t sell again.

Circumstantial evidence and on-chain behavior suggest stackers and HODLers have settled in for the long haul, and they control the largest portion of the market since 2016. Key sentiment indicators remain in a healthy equilibrium. Key metrics show strong market conditions.

Still, you can’t help but expect the market to collapse.

You know it’s coming. I know it’s coming.

The whole world knows it’s coming.

The only questions are when, from what price, and by how much.

Confronting obstacles

As long as Bitcoin’s price stays above $15,600, this is a bull market.

As long as Bitcoin’s price stays above $24,000, we’re in Act 2 of the market cycle.

In classical storytelling, Act 1 sets the scene, introduces the major characters, and makes clear the hero’s objective.

• Scene: the aftermath of the collapse of crypto lenders and fraudulent market markers.

• Major characters: the US government, CZ/Binance, Grayscale, China / Hong Kong, Wall Street, shady exchanges, developers, and influencers.

The hero is you.

What's your objective? Do you want more of your government’s money? A stake in the financial networks of the future? Some trades that can 5x your investment? Cheap crypto that you can sell in bits and pieces as prices go up?

This market offers something for everybody. What do you want to get out of it?

You should know by now. If not, figure it out before the market starts zooming. I’m happy to consult—feel free to book a time with me.

Act 2 brings challenges, setbacks, and conflicts that you must overcome to accomplish your goal.

During this act, your faith gets tested. Every dump seems like a reason to sell. You struggle to reconcile the terror of 2022 with the relative tranquility of 2023. When the market goes up or down by 20%, your brain knows that's mild relative to historical volatility, but your gut tells you more bad things will happen.

Depegged stablecoins, insolvent exchanges, protocol failures, hostile regulators, frauds, hacks, and all sorts of nonsense will seem urgent and eminent when they’re simply risks that exist in all market conditions—bull, bear, and everything in between.

You wonder how the same problems that seemed to haunt the market last year still exist, but prices go up anyway. You figure your altcoins suck because they’re lagging behind Bitcoin. The narratives all seem broken. You question your judgment and doubt your decisions.

Have faith! The challenges never stop. Neither do you! In this story, the hero wins in the end. You’re the hero!

You only need to worry about the typical 30-50% drops that we see multiple times in every bull market.

If we get a global financial crisis, some big protocol failure, or Tether/Binance collapse, Bitcoin’s price could go as low as $14,000 and altcoins could do worse. That could happen for something less serious, too—like a collapse of FRAX, DAI, or TUSD, some mischief related to Justin Sun and his various projects, and all sorts of other hypothetical tragedies.

Save that feeling of dread for when the market zooms to $48,000 and everybody talks about new all-time highs or left-translated cycles. Buy into fear. Fade the hype.

A sequel, seven years later?

If anything, we should expect something comparable to 2016—sideways with big upswings and downswings for weeks or months before a big ZOOM followed by a big crash, maybe with another ETH hack or the collapse of some big exchange.

In my updates for premium subscribers over the past number of months, I’ve pointed out coincidental similarities with early 2016 on multiple dimensions. Macro circumstances. On-chain movements of Bitcoins. Uncanny similarities in some trading indicators, mirror-image changes in key metrics like Puell Multiple, MVRV Z-Score, various measures of profit and loss, and changes in the composition of HODLers.

Crazy.

Even the price action matches, for example, oscillating above and below the long-term “Fib retracement” of .236, a key psychological level where prices tend to go up and down within a trend. Same fib, as you see as the black lines on this chart:

Also, “macro” circumstances in China and the US, plus general global economic trends rhyme with what you saw in early 2016.

Coincidences?

Maybe.

Then again, maybe that’s ok.

Sometimes, when you overlap a bunch of coincidences from different angles that look at different behaviors across different dimensions as they change over time, and they all match up, you can get a much clearer picture of the market than you’d get from cherry-picking a key chart, projection, or trend.

Stick to the plan

With your subscription, you will also have access to my plan for buying and selling Bitcoin.

If you followed that plan, you’re up as much as 400% or down as much as 62%, but probably closer to up 17% on your investment.

On average, you have 30% more Bitcoin than you would have gotten from dollar cost averaging and you almost certainly beat most traders.

You sat out most of 2021, bought for most of 2022, and caught the dips in 2023. You saw the bearish pattern forming in July when everybody else was hyped. You faded the stablecoin shenanigans that pumped the market when everybody else called for $1 million Bitcoin and ETFs.

Today, you’re buying. Tomorrow, who knows?

About that US economy . . .

Mark, is a US recession off the table?

This tweet says all you need to know how I feel.

As long-time readers know, I’ve prepared for a recession since the end of 2021, when the US economy reached full employment. Recessions always come within 5 years after the economy reaches full employment, often within 2 years. It’s a more reliable signal than the inverted yield curve.

If you’re not prepared for a US recession, get prepared now.

As far as crypto is concerned, we don’t know how it will perform in a US recession. The US changed its definition in 2020, so we can’t count the two consecutive quarters of negative real GDP in 2022 as a “recession” anymore.

That also assumes the US matters for crypto as much as it used to. Since early 2022, we’ve seen a big drop in the portion of crypto in the hands of US entities.

US-based VCs are rekt. Some moved overseas. Investment and leadership migrated to Europe, Southeast Asia, and parts of South America and Africa.

As I noted in May’s monthly post, US money doesn’t move crypto markets like it used to.

Outside of China and some parts of Europe, the world’s economies are growing. Re-shoring and structural adjustments have made many countries disconnected from the US financial system and less reliant on China’s welfare. Maybe those changes serve as a buffer to whatever tumult comes from a decline in so-called “advanced” economies.

Since you have a good allocation to crypto with cash to spare, you don’t have to worry about the US economy.

• Higher for longer? Cool. When my plan says to buy Bitcoin, buy some Bitcoin. Altcoins, too, if you prefer. While you wait for opportunities to present themselves, drop your cash in a money market fund or short-duration T-bills. You’re already getting the best deal in a generation and it will only get better.

• Soft landing? Cool. You already have a strong allocation in case the good vibes bring new buyers and speculative interest. People will tell you to worry when the Fed cuts rates, but they’re selectively picking their facts. The Fed has cut rates many times in its history. Investments suffered only sometimes.

• Hard landing? Cool. You have spare cash to buy cheap crypto before the Fed pumps the markets with cheap money.

• Fed pivot? Cool. You’re in a position to ride the next wave higher.

Mark, which will it be?

Only Twitter psychics know the answer to that question, and they won’t tell you until after it happens.

“Circular” economy

Since raising interest rates, the US government and central bank replaced $1 trillion worth of bank loans with $1 trillion of direct payments to bondholders.

Is that net stimulative? Do you actually take money out of the economy if you’re just moving it from the banks to the US Treasury to the private sector?

Yes, of course, you can see this in the M2, one measure of the US money supply. It went down for almost a year after peaking in early 2022.

Mark, since April 2023, M2 is going up again!

Yea. Funny, isn’t it?

This chart has no predictive value and no longer reflects how money works in our modern economy, I'm just pointing out a practical reality. An example to illustrate a broader concept. “Close enough for government work.”

My point:

Maybe higher interest rates don’t always have the drastic consequences people expect. Higher rates hurt borrowers but help savers. Crypto is full of savers.

Also, crypto businesses that hoard cash.

Coinbase and Circle spend more money running their businesses than they take in from revenue on their products and services. They lose money from their business operations. But they’re getting a ton of interest income from parking their spare cash with the US government.

If they didn’t put their spare cash into government bonds and interest-bearing cash accounts, they’d plow more money into unprofitable economic activities, as they’ve done for years. They’d have no return on that investment, only more costs and expenses.

Instead, the US government pays them to not make unprofitable business decisions. They use that cash to keep their businesses afloat while they figure out how they can generate profits.

Coinbase has a powerful vision and the credibility to become a leader in Web 3.0. Circle provides a valuable financial product in a highly competitive niche. They need to figure out how to deliver those things profitably (or hope the market turns around before they do).

How many other businesses are in the same position? Unprofitable but full of cash and potential, floating on a guaranteed return of 5% (or more, if the Fed keeps raising rates).

At some point, they’ll drain that cash. They’ll have to pay the piper eventually.

When? In six months? A year? Two years?

Will that day of reckoning come abruptly, in confluence with those other businesses that likewise can’t float forever? Mass layoffs? Mass bankruptcies?

Or, will it happen gradually, like rolling blackouts where one group of people suffers a little bit, then a different group of people suffers a little bit, and then a third group of people suffers a little bit, and so on, but society as a whole makes it through only a little worse for wear?

Maybe it plays out some other way?

You can’t know this from looking at macroeconomics or credit metrics. That data does not consider the arbitrary decisions of governments or the reserves of people who use cash instead of credit.

When you look at financial data, the year-over-year changes look abysmal. The raw numbers look fine—in some cases, they’re way below normal levels, let alone anywhere near “bad” levels.

For example, bankruptcies and auto loan delinquency rates are up.

If they keep going up this pace, they’ll get back to pre-pandemic levels within a few years—assuming the US government doesn’t create a forbearance program, lender/borrower subsidy, or some other intervention.

As long as your government can wave its magic wand, you can only plan so much.

The Fed giveth, the Fed taketh away

In my day, we were taught that recessions happen when aggregate production exceeds aggregate demand.

In other words, they come when economies create more things than people can afford to buy, not because the central bank replaced $1 trillion in bank lending with $1 trillion in direct payments.

I guess I was taught wrong. Now, recessions come and go at the will of the Fed. They are no longer a symptom of markets rebalancing and eliminating natural excesses, but rather a product of financial engineering or policy decisions.

The Fed uses many programs to support the US financial system. Open market operations, repo, reverse repo, the discount window, swap lines, and a bunch of pandemic-era lending facilities (most of those are now closed).

Some of these programs are beyond my comprehension, but they are all part of an elaborate system that’s developed over decades.

“Plumbing,” as the experts call it.

I’m not a plumber or an expert, but if I had to guess, all these programs conspire to make interest rates less important. When money is a meme and the system is manipulated at will, the federal funds rate might not have as much importance as we used to think.

Rainmakers

Imagine you and I went outside on a warm, sunny day. After extensive discussion and research, we reckoned that if we jumped up and down and chanted songs, we could bring the rain.

We did it and got no rain.

Undeterred, we did it again the next day. Again, we got no rain.

On the third day, we did it again—and it rained.

Validation!

From that moment on, whenever we wanted rain, we danced and shouted.

Sometimes, it rained that very day. Other times, it would take a good week or more before we got any rain.

We figured that’s normal—rain dances have a long and variable lag.

To get more precise in our rain-making ability, we charted weather patterns and constructed some meteorological theories. It turns out our dancing was more effective on cloudy days. If we started immediately after hearing thunder, we had an almost perfect success rate.

We also discovered some seasonal correlations from one year to the next.

For planning purposes, we put together dot plots and projections based on a Dance Productivity Index, or DPI, as well as surveys and other metrics. People tweeted these things out and started planning picnics around our dances.

As long as we danced every day, it eventually rained. Like clockwork, if your clock has no numbers and sometimes stops working without your knowledge.

They will use data to deceive you

Why do people think our dances are nonsense but dot plots are vital data? Why do the CPI charts matter more than our DPI charts?

I can tell you why.

Because centuries of empirical meteorological study proved that dancing does not cause rain.

Rain is a natural phenomenon that we can anticipate with some certainty when experts see a confluence of factors, but with not enough precision to account for changes in circumstances and the vagaries of climate, wind, and geography.

We can plan for rain. We can make umbrellas, huts, shelter, water-resistant clothes, and all sorts of other things that protect us from the rain. We can find productive uses for rain and change our behaviors to make the most of the times when it rains.

We can’t make it rain, no matter how much our leaders and their followers convince themselves (and us) that they can do so.

Eventually, somebody will figure out how to summon and dismiss the rain. Let them try!

Until then, we mere humans can only figure out how to deal with the weather.

After centuries of economic research, our financial elites can't run monetary systems with enough precision to give us the results they expect.

With cryptocurrency, maybe we can figure this out. We can build immutable protocols, release them to the world, and observe their consequences. We can control for variables and present multiple competing systems to see what works best.

Better yet, we can do this without compelling people to adopt any one system.

If you want to stick with the legacy financial system and its closed systems of control, you can!

If you want to tap into vast, global, permissionless pools of capital that run on cryptocurrency, you can!

Cryptocurrency is money for the people, not the elites. We’re building financial systems that people create and control, free from the whims and burdens of financial elites.

Your government needs to make its money legal tender or find other means of coercion to get people to use it. Cryptocurrency just needs to work.

This is technology we can use to make more compelling, robust, secure, and effective ways to manage money, finance, and commerce. To make it rain, as they say.

And what will we do if we can’t make it rain money?

Enjoy durable financial systems that everybody can access on whatever terms the market provides.

Money for the haters, too

Many do not believe this is possible. Truth can only come from authorities, they say. Money can only come from the state.

They sell you fancy graphs that you can’t understand and correlations that hold up only sometimes. They argue the field of economics and financial governance has advanced so much that it can capture all the variables, happenstance, serendipity, and nuances that drive modern economies.

I’m not so sure we need to put our financial elites on a pedestal that they don’t deserve. They admit they don’t always know the consequences of their actions. Why should we expect more from them than they expect of themselves?

Maybe that’s the source of hate. Envy. Grief.

We’re trying to build a financial system where the government does not control the supply of money or its distribution.

Where the elites must plan, vet, and parse every decision, we get the luxury of iteration, experimentation, and empirical discovery. Trial, error, failure, success . . . and the burden of naysayers.

Now that anybody can create money anywhere, anytime, for any purpose, with whatever rules they want, you get a lot of good and bad ideas. Also, a lot of good and bad people.

Since the cryptosphere has a lot of bad ideas and people, it’s very easy for haters to find ideas and people to mock, scorn, vilify, and ridicule.

Some of them do it as valid, constructive criticism. Some of them do it because they’re mean, arrogant, and spiteful.

Some of them do it for personal gain.

We have a cottage industry of skeptics and conspiracy theorists who get emotional fulfillment from exposing bad actors, telling uncomfortable truths, and spreading obvious lies.

• David Gerard has carved out a nice niche for himself as a perennial hater.

• Ben McKenzie got a book deal, social media exposure, and appearances on radio and TV.

• Bill Maher got some great segments out of it. So did John Oliver.

• President Biden used cryptocurrency angst to get support for his tax plan.

• Protos got a lot of clicks.

Cryptocurrency is so full of grifters that even the skeptics are grifting off of it!

The irony?

The haters and lovers both use cryptocurrency to enrich their lives.

Every tweet or book from a hater leads to a new person hearing the word “crypto” or “bitcoin.”

(Also, money for the haters who write the books and post the Tweets.)

Each indictment or accusation leads to somebody with political power taking an interest in crypto. Even if they’re just doing it for votes, money, power, adulation, or attention, every little bit counts.

When criminals, frauds, and hypesters drag cryptocurrency’s reputation into the mud, they give people like us an opportunity to talk about the good things that cryptocurrency can do.

Good or bad, these activities make crypto seem real, legitimate, and worthy of attention.

Nobody kicks a dead dog.

As long as they still talk about crypto, we need to fear nothing. They’ll open the conversation. The market will do the rest of our work.

That will take time. Hearts and minds don’t change from sound arguments, logic, or reason.

Once prices go up, people will find reasons to justify putting money in. Their fear and greed will compel them to find the “right” narratives.

Until then, we have a long road ahead of us. Challenges will come. We’ll deal with them. Protocols will fail. We’ll persist. Projects will die. We’ll live.

Nobody knows how long Act 2 will last.

Don’t worry! In this story, the hero wins. You are the hero.

Relax and enjoy the ride!